Charles Schwab Corporation (The)

everyone, and welcome to this Rob 2024 Summer Business Update. This is Jeff Edwards, Head of Investor Relations, and I'm joined today by our Co-Chairman and CEO, Walt Bettinger, President Rick Worcester, and CFO Peter Crawford. We got a bit of an early start today to beat the Texas heat, so let's run through our housekeeping items and get in today's remarks. The slides for today's business update will be posted to their usual spot on the IR website at the beginning of Peter's section. Q&A remains structured as one question, no follow-ups, please. So you can certainly re-enter the queue to ask another question if time permits. And as always, please don't hesitate to reach out with any follow-up questions for the IR team. And lastly, the Wall of Words, which showcases our forward-looking statements, reminding us that the future is uncertain. So please stay in touch with our disclosures. And with that, I'll turn it over to Walt.

Thank you, Jeff. And good morning, everyone. Thanks for joining us for our July business update. Earlier this year, we spoke about 2024 being a transition year for the firm. We defined this year as transitional for a series of reasons. We were anticipating completing the last transition groups from the Ameritrade acquisition, and we anticipated that former Ameritrade clients would move from negative asset flows to positive levels of net new assets. We further anticipated that former Ameritrade retail clients would begin to utilize Schwab capabilities in the areas of investment advisory, financial planning, and banking. We anticipated the investment advisors who formerly used Ameritrade for custodial services would also begin to bring net new assets to Schwab, and their evaluation of our service levels would improve rather dramatically. We anticipated that Schwab users of StreetSmart we'd begin to take advantage of the powerful trading capabilities in the thinkorswim platforms. From a capital standpoint, we anticipated that we would organically build capital throughout the year toward our long-term objectives. And from a financial standpoint, we anticipated improving, albeit somewhat uneven, earnings results during the year with Q4 2024 delivering somewhere between 80 and 90 cents and then with strong growth continuing into 2025 and beyond. Halfway through the year, this definition of a transition year is being realized, again, as we anticipated. And all of these issues position us for a strong period of growth in client metrics and financial results in the coming years. So with these critical indicators of success unfolding in such a positive manner, let's take a quick look tactically at how the second quarter of this year looked. Inflation showed some encouraging signs of moderating closer to the Fed target of 2%, which continued pushing a select number of primarily technology stocks ever higher during the quarter. Investor sentiment remained solidly positive at quarter end, with investors purchasing stocks throughout the quarter, and overall trading activity was a bit higher than in the prior year. Now, as I stated earlier, as we anticipated, we completed the last client transition group during the second quarter. That's almost $2 trillion in assets, 17 million client accounts, and over 3.5 million daily average trades, all done with attrition levels that are well below other integrations in our industry, as well as our estimates at the time of the acquisition, which were 5 to 6 percent asset attrition and 4 percent revenue attrition. And while it's still somewhat early, the client response to the combined platform has been even stronger than we anticipated. Promoter scores for former Ameritrade retail clients are now increasing about 50 points nine months post-conversion date, while the promoter scores for advisor services, including the former Ameritrade advisor clients, have returned to pre-conversion levels. Impressively, former Ameritrade retail clients who converted in 2023 are already bringing in assets on a net basis. However, their level of net new assets still remains below our target range. Clearly, this illustrates that we're reaching an inflection point as attrition continues to abate and we rebuild back to firm-wide net new asset levels in our targeted 5% to 7% range. And lastly, former Ameritrade retail clients are already making up about one-third of our overall enrollments in advisory solutions, an early illustration of the power of combining the two firms and their interest in Schwab's broader offering of wealth management solutions. The overall client engagement was solid in the second quarter with the equity buy-sell ratio at about 1.1, while daily average trades remained at relatively high levels for a second quarter and above the same period from last year. Meanwhile, we've seen a large increase in interest among our clients in our managed investing solutions. So, overall, key client metrics continue to be solid. Net new assets year to date were over $150 billion, including Q2 asset gathering of about $60 billion, up 17 percent from the same period last year. Again, still somewhat below our long-term goal of 5 to 7 percent through an economic cycle, but growing closer to that figure as the impact from former Ameritree client attrition begins to wane. New brokerage accounts were again almost $1 million, I'm sorry, 1 million accounts during the quarter. Looking deeper at the types of clients we're attracting, these new to firm households continue to set us up well for the long term with almost six out of 10 new clients under the age of 40. and investment advisor clients of all sizes continue to entrust their client assets to our custodial services. For years, we've emphasized that Schwab Advisor Services is the premier offering for RIAs of all sizes, and we are equally committed to each segment of advisors. And these net new asset results are particularly encouraging as they reflect our success serving again every size advisor. Let me take a brief step back to take a more big picture look at Schwab and the growth trajectory we've been on for over 50 years. From our origins as a discount broker, we have continually listened to client needs as well as anticipated client needs and added services and capabilities along the way. What is key is that we have always done so in a Schwab way, through client size, at a great value, and without the client having to accept trade-offs. We call that modern wealth management. And when we look to the future, we believe this formula will only serve to build our market share larger and larger. Of course, one of the key capabilities we've added along the way has been banking services. to meet the needs of our clients on both sides of their personal balance sheets. Now, some have asked us, after the regional banking crisis of 2023, whether we remain committed to serving our clients' banking needs. And the answer is a definite yes. That said, we have studied our approach to offering banking services in recent quarters and wanted to share a few additional perspectives on how we see banking unfolding in the future at Schwab. Offering lending services to our retail clients and the clients of the investment advisors we serve is important. Arguably, it's critical, as it meets client needs and deepens relationships in a meaningful way. Most of our significant competitors have the ability to assist clients with both their investing needs as well as their borrowing needs. We believe firms that do not offer lending services are at a strategic disadvantage that will show itself more and more over time. So we're committed to offering quality lending services in a manner consistent with how we lend today, exclusively for our clients, residential mortgages, HELOCs for clients who have their first mortgage with us, and pledged asset lines. And to support lending for our clients, we continue to invest in both technology to make the application and approval process streamlined and efficient, as well as experienced bankers who can help shepherd the more complex loans through. From the standpoint of the investments we make at the bank for deposits in excess of those needed for lending to our clients, over time, and by that I mean years, not months or quarters, we would envision some shortening of our overall balance sheet investment portfolio duration. That could lead to some modestly higher earnings volatility through an interest rate cycle, but should help reduce volatility of our capital levels and the need to access supplemental borrowing when interest rates potentially rise rapidly. One of our objectives is to increase our emphasis on attracting transactional bank deposits like checking balances with our award-winning checking product. This will serve as a means of increasing liquidity and further stabilizing our overall deposit base. And we envision the potential to increase our usage of third-party banks like TD Bank and others to achieve the following goals. deliver extended FDIC insurance for clients, lower our capital intensity, and improve liquidity, subject, of course, to obtaining economics from the third-party banks that make sense for us. Net, these various actions should lead, again, over time, to a bank that is somewhat smaller than our bank has been in recent years, while retaining the ability to meet our clients' banking needs lower our capital intensity, and importantly, protect the economics we're able to generate from owning a bank. So while we see some modest changes in the way we manage and operate our bank, one thing you can count on, we will continue to operate our business in the Schwab way, making decisions through clients' eyes, offering clients great value, and delivering service and advice to our valued clients without asking for any trade-offs. So, Rick, let me turn it over to you for some more discussion on our efforts as well as results during the second quarter.

Mr. Thanks, Walt, and good morning, everyone. With the successful completion of the Ameritrade conversion behind us, we are looking ahead to an exciting new chapter as we continue to advance our four strategic focus areas. And we will do so from a position of strength, having fully combined the best of Schwab and Ameritrade to offer our clients a no trade-offs experience. Our ability to increase our scale while also continuously driving efficiency in our operations remains one of our key competitive advantages. The Ameritrade integration is a clear example of how we have vastly increased our scale while cutting costs. And by the end of this year, we'll realize the remaining 10 percent of run rate expense synergies from the acquisition. Over time, our growing client base, our cost discipline and our ongoing investments in technology will continue to help us reduce our costs to serve our clients in the same way it has over the past decade as we've decreased our cost per client account by 25 percent, excuse me, and by around 50 percent when you consider inflation. We plan to build on this competitive advantage. We will invest in technology including artificial intelligence, that will ultimately help us lower our costs. We will implement operational enhancements and process transformation so we can serve our clients even more efficiently than we do today. And as we continue to increase our scale and enhance our efficiency, we'll reinvest in our clients over time and support our growth for the long term, just as we've done historically. Win-win monetization is about meeting more of our clients' total financial needs. By offering the ease and convenience of having them bring more of their financial life in one place, we're also able to bolster our revenue growth. And our wealth business is growing quickly. And this is a win for clients as client promoter scores for our advice solutions are among the highest at the firm. So these are our happiest clients. And it is a win for us. Year to date, we've attracted nearly $25 billion in managed investing net flows, a 56% increase over last year. And we see strong net flows across our spectrum of solutions. And you can see the growth on this page, 40% in Schwab Wealth Advisory, 53% in Wasmer Schroeder, and 127% in Schwab Personalized Indexing. By offering our clients a broad spectrum of the wealth solutions they need, we're also supporting growth in our fee-based revenue streams, as you can see with the growth in our revenue on the right-hand side of this page. Looking within our wealth solutions, I wanted to do a bit of a deeper dive into our WASMR strategies. These fixed income strategies provide clients with a wide range of tax-exempt and taxable solutions. Clients also have access to a dedicated team of portfolio managers and portfolio personalization capabilities, all at a lower cost than competitive offerings. With total assets under management of $25 billion, we've seen assets in these strategies grow at a compound annual growth rate of 23 percent since our acquisition in July of 2020 and have grown by nearly 80 percent in the last two years where we've had a higher interest rate environment. This year, to date alone, we've seen net flows of $4 billion, demonstrating that these solutions are indeed meeting client needs. Turning now to client segmentation, at Schwab, we will always meet the needs of a wide spectrum of investors and RIA firms, but we also need to serve our distinct client segments. And strong relationships are the foundation of our ability to do this. When we build relationships by meeting client needs and meeting clients where they are and with the service models, the tailored education, and the specialized capabilities they need, we will retain our existing clients and attract new ones. RIAs, which are one of our key client segments, we strengthen our relationships with RIAs of all sizes through an unparalleled offer that helps each of them grow compete, and succeed. For example, we offer advisors turnkey asset management solutions, flexible technology, and highly specialized business consultant teams, all at an incredible value with zero custody fees and no intention of changing that. Turning to our retail business, high net worth retail clients are another important segment where the power of strong relationships is clear. Our high net worth retail investors who have a financial consultant bring in more than three times the average household net new assets, 2.8 times the managed investing net flows, and have better TOA ratios and notably higher client promoter scores compared to retail high net worth clients who do not have an FC. Continuing to invest so we can build and expand on these valuable client relationships will help support our growth over the long term. Our fourth strategic focus area is the brilliant basics. We know that if we can make it even easier for our clients to do business with us, and if we can deliver on the basics for our clients in every interaction they have at Schwab, we'll build loyalty and our delighted clients will grow their wealth with us and refer their friends and family members to us. One example of how we're delivering on this for clients is the enhancements we continue to make to the best in class Schwab mobile app. We know clients and third parties like it today. Our mobile app has a 4.8 star rating on the App Store. And for the second year in a row, Corporate Insight has ranked us the number one mobile app experience among brokerage firms. And we continue to invest in and enhance that experience. We're introducing features our former Ameritrade clients love, like the recently launched customizable dashboard. Other recent and planned enhancements will simplify the client experience by reducing clicks and expanding on our customization capabilities. Guided by our consistent through client size strategy, we remain well positioned for continued growth. While there are several factors that can influence asset gathering in the near term, things like the macroeconomic environment, seasonality, and some behavioral differences we see in the former Ameritrade client base, we believe our through-the-cycle growth recipe remains intact. Over the longer term, we expect we'll continue to see 5% to 7% annualized NNA growth from existing and new clients. bolstered by delivering on our four strategic focus areas. As we've shared, 2024 is a transition year. With strong client engagement, a successful integration, continued progress on our strategic focus areas, and opportunities to introduce our client base to the best of Schwab and Ameritrade, we remain well positioned to continue serving our growing client base in delivering profitable, long-term growth to stockholders. With that, I'll turn it over to Peter.